Although it’s still early in the season, it appears that team Facebook (FB, Financial) has taken an early lead in the league standings over its regulatory rivals in both the U.S. and Europe. But Facebook investors who might want to jump for joy should give pause; the season is far from over and the ultimate outcome far from certain. Remember the 2004 Red Sox?
Facebook seemed to coast through its initial examination with European Union lawmakers this past May. The procedural format of the hearings,with only limited follow-up permitted, clearly favored Facebook as the company, through CEO Mark Zuckerberg, responded to specific inquiries from legislators with some very nebulous answers.
His responses were almost identical to those given to his U.S. congressional interlocutors earlier this spring: “We didn’t take a broad enough view of our responsibility—that was a mistake and I’m sorry for it,” Zuckerberg said. “I’m committed to getting this right.” In terms of Zuckerberg’s offering concrete privacy proposals, many members of the European Parliament viewed the entire hearing as the triumph of form over substance.
As reported by the Wall Street Journal, Zuckerberg didn’t respond to questions over whether the social network would ever allow users to knowingly and easily opt out of targeted advertising, and whether he thought it was morally correct to collect data on people who don’t use Facebook.
In addition, one British Conservative member of the European Parliament, Syed Kamall, described the process as a “get out of jail free card” because it gave Zuckerberg “too much room to avoid the difficult questions.”
The Journal further noted that other members were dissatisfied by the substance of Zuckerberg’s responses. Speaking to reporters after the hearing, German leftist MEP Gabriele Zimmer called them “very general answers.” Jan Philipp Albrecht, the German MEP from the Green Party who lead the General Data Protection Regulation negotiations, told reporters: “I am shocked that Zuckerberg didn’t take this seriously at all.”
Although Zuckerberg’s evasiveness with EU legislators may have allowed him to momentarily dodge a bullet, more scrutiny is on the way.
It is manifestly clear from the initial interactions between Facebook and its would-be regulators that many of them are ill-informed on the nature of Facebook’s unique and complex business model. In order to propose regulatory provisions that would satisfy the oft-cited concerns for privacy, regulators need a thorough understanding of Facebook’s business model, its revenue sources and how it is that the company has been posting operating margins that are the envy of every tech company in the market.
This blissful ignorance on the part of those who propose reining in the social media giant was on display during Zuckerberg’s testimony before the joint Senate and House Commerce Committees. Zuckerberg, unsurprisingly, ran rings around the politicians seeking unsuccessfully to ascertain how Facebook will modify its existing business practices to implement privacy and security safeguards.
It also should be noted that prior to enactment of the GDPR, European Union officials had extensive meetings with Facebook officials in an attempt to better understand what, for many regulators, is an arcane and complex business/tech advertising model with many moving parts.
Here is the reality, undoubtedly not lost on Zuckerberg nor the architect of the entire tech advertising model, Sheryl Sandberg: any effective regulatory regime that is concerned with users’ privacy, however limited in scope, is going to hamper Facebook’s lucrative business model.
The dilemma for Facebook is that it wants to reassure shareholders on the one hand that the impact on the company’s earnings caused by any future privacy regulations will be de minimis, yet, on the other, offer to enact, as yet, unspecified measures to protect users' private data.
Perhaps that is what prompted Carolyn Everson, Facebook's vice president of global marketing solutions, to comment at a Wall Street Journal-sponsored CEO Council meeting in London this spring that, “We have not seen wild changes in behavior with people saying 'I’m not going to share any data with Facebook anymore.'” Everson told the Journal the company also doesn’t expect stricter privacy laws, which could lead consumers to opt out of targeted ads, to cut into its ad sales, noting, “We are not anticipating major changes to our overall revenue and business model.”
Although this sanguine statement concerning limited potential loss of revenue may have assuaged stockholders, it constitutes a gross misrepresentation that is so misleading it was close to being actionable under the U.S. Securities laws.
Facebook is currently skating by the regulators because lawmakers in Europe, pursuant to the recently enacted GDPR laws, are in the incipient stages of implementing existing regulations, while in the U.S., regulators have not yet proposed any substitutive restrictions on Facebook’s ability to operate unhindered.
These are all important factors with regards to the scope, extent and effectiveness of regulatory requirements. They will determine whether Facebook continues to operate with impunity, offering legislators illusory safeguards on privacy concerns that substantively do not respond effectively to the original intent of the regulatory provisions, or whether they will be circumscribed in a manner that materially affects their revenue stream.
Disclosure: I have no positions in any of the securities referenced in this article.
